In the traditional offline media (TV, radio, print), agencies typically charge 15% of the marketing spend as their fees. So for example, if your company is spending $100,000 on print advertising, the agency that you’ve hired gets $15,000 for their services, which could include ad design and creation, media engagement, etc.

I recently came across a great column by Kevin Lee mentioning that because of all the optimization work that has to be done around SEM, the 15% fee may not be enough and clients should be willing to spend more on agency fees. Kevin is right. There’s a lot of work that needs to be done in the area of SEM optimization. Here’s a few must-dos for an effective campaign:

Research the list of potential keywords to be targeted

Select the keywords to be targeted through SEO, those through SEM, and those through both

Create the right ads for keywords. You simply cannot use the same ad for all your keywords and the rule applies as you go from one outlet to next

Determine the budget to be allocated to each

Create specialized landing pages for each ad

Well, you get the idea …

This becomes especially an issue with smaller clients since they won’t be able to leverage the economies of scale and scope enjoyed by larger clients who spend more money on more keywords.
At the same time, I couldn’t help but notice the disincentive between CPC and agency fees. I understand why agencies use a 15% fee on offline ads – there’s no viable measurement beyond the output. You can only reasonably measure the number of times and the money spent on ads. But in the online world, things are different. You can measure the entire visitor cycle – from impressions, to clicks to conversions.

Think about it: would you rather spend $10,000 and generate 10 leads or spend $1,000 and generate 50 leads? Of course you’d like the latter, but in the world where agencies are paid by CPC, their incentive is to spend more money. They’ll benefit from having you spend $10,000, whether the campaigns are optimized or not, whether the conversion funnels are streamlined or not.

Ideally, agency incentives should be the same as the clients: get the most you possibly can from your marketing budget. This means that their fees should be tied to your conversions – online purchase, leads, registrations or whatever they may be. Don’t get me wrong. I’m not saying agencies should not be paid for all the optimization work that they do. They absolutely should. But perhaps it’s time to introduce more complex pricing schemes that do every body justice: a one-time fee and maintenance fee to cover the work to be done to get the campaign going, and a conversion/engagement bonus that gives the agencies the incentive to outperform.

This way, the agencies will get compensated with all the leg work necessary to get started and will be incentivized to constantly outperform, to constantly work on ways to increase their campaign conversions.

I’d also like to hear about some of the payment schemes you’ve used that have worked for you.

Ali is the Co-Founder of Tealium. Prior to co-founding the company in 2008, he held several senior-level positions at WebSideStory (now Adobe Systems), Visual Sciences, and Omniture. He joined WebSideStory in a product management role where he managed the company’s enterprise level products, and later joined the company’s professional services team managing strategic clients. Ali holds an MBA from UCLA Anderson School of Management.